Lesson One: Your Estate Planning Scorecard (continued)

Estate Planning: Unloading the Boat

Nineteenth century English humorist Jerome K. Jerome encouraged readers to “let your boat of life be light, packed only with what you need – a homely home and simple pleasures, one or two friends worth the name, some one to love and some one to love you . . . ”

That simple philosophy has remarkable appeal today, when you consider that most of us load up our “boats” with far weightier cargo:  investments, real estate, 401(k) plans, personal belongings, business interests, life insurance – all the baggage of life in the 21st century. Estate planning deals with the process of how best to unload the boat, at a minimum of expense and in line with your personal desires and hopes for the generations that follow.

Elements of a Good Estate Plan

Estate planning has two very basic aims: making certain that after your death your property will be disposed of according to your wishes and protecting against estate “shrinkage” brought on by the federal estate tax, expenses of estate administration, lack of estate liquidity and other causes.

Your thoughtful will should be the cornerstone of your total estate plan. It gives form and substance to your thoughtful concern for the future of your family and other beneficiaries. There are, however, other practical opportunities and potential problems that should be considered in your estate planning.

A trust, created during life or in your will, may figure prominently in your estate plan. Through a trust you can provide income for your family, transfer investment worries to a trustee of your own choosing and perhaps even save on federal estate taxes and estate administration costs. The magic of a trust can also allow you to provide dual benefits to your family and our programs, with meaningful tax and financial rewards.

Total coordination of all your assets – your life insurance, your jointly owned property, your retirement benefits, everything you own – is absolutely vital to a smooth-working estate plan. Remember that your life insurance and jointly owned property usually will pass independently of your will.

Your retirement plans ought to be part of your estate plan. You should try to integrate the tax advantages of a qualified retirement plan (such as a company pension plan, an individual retirement account or a 401(k) or 403(b) plan) into your estate-building plan. It may make sense to select retirement plan death benefits when you provide for charities in your estate plan. Private beneficiaries may owe income taxes on the death benefits they receive; charities, of course, are tax exempt and would lose nothing to the tax collector. Estate tax charitable deductions are available, as well.

Lifetime gifts to family members and others continue to offer an avenue to gift and estate tax savings as well as present satisfaction. You can make separate gifts of up to $17,000 each year to as many different people as you choose, owe no gift tax and remove these amounts from the grasp of the federal estate tax. (Spouses can “split” gifts and increase the tax-free amount to $34,000 per year, per donee.)

Choosing your executor (personal representative at death) is a vital decision that presents a basic choice between an individual or a corporate executor. Many people prefer the personal attention of a spouse or other close relative as individual executor, but a corporate executor, such as a bank or trust company, may be better suited if your estate is very large or complex. A comfortable middle ground may be the selection of co-executors: one individual and one corporate.

Arranging for liquidity in your estate can prevent the untimely sale of valuable income-producing properties to settle the estate. “Liquidity” means a fund of cash, or investments readily convertible to cash. Don’t leave your executor in a locked-in position. An irrevocable trust is an excellent arrangement for providing the executor with the necessary estate liquidity to meet estate expenses – and the value of the trust will not be taxable in the estate.

A living will, to make clear your desires on prolonging life with artificial life support, can provide guidance and peace of mind to your family. Plan for disability as well, through a general durable power of attorney or a living trust. Your legacy to future generations can be assured by including in your estate plan those institutions and causes you supported during life. Consider a bequest for our future as part of your will, living trust or beneficiary designations for life insurance, savings or retirement accounts.

Estate Planning and Your Surviving Spouse

Every wife and husband realizes the inevitability that one of them will outlive the other and perhaps spend many years as a widow or widower. Spouses should prepare for life without their marriage partner – to be ready when the time comes not only to handle the details and decisions that follow a spouse’s death, but also to deal with financial and practical matters.

Most married couples divide up household duties, “specializing” in particular chores such as gardening, car repairs, laundering and grocery shopping. This specialization often extends to financial matters, with one spouse paying all the bills, figuring the taxes and balancing the checkbook. There’s nothing wrong with division of labor between spouses, but it is vital that a husband and wife each understand the financial aspects of their partnership. With that in mind, consider the following suggestion:  Choose a month every year when each spouse “trades jobs” – particularly those tasks that have to do with financial matters.

If your spouse typically pays all the bills, consider taking over that assignment for the entire month of his or her birthday. (To keep peace in the family, let your spouse check your work!) If you usually write the checks, suggest your partner make a “gift” to you of a month’s bill paying. Everyone benefits from such a favor. Talk with your spouse about why certain checks are being written, such as payments for insurance or estimated taxes. Take turns making deposits in your checking and savings accounts. Make sure both of you have full understanding of your investments and other sources of income.

Has Wall Street Rewritten Your Will?

Recent fluctuations in the stock market make it important to review plans for how your estate will be distributed. Examine your will or revocable living trust to see if changing stock values could result in some of your beneficiaries being affected.

One way to avoid this possibility is to bequeath percentage shares of the estate, so that the impact of changes in the value of securities or other estate assets is shared proportionately by all beneficiaries. Another possibility is to anticipate potential reductions in value and provide for smaller specific bequests in the event one’s total estate falls below a certain value.

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